Free & Clear: July 2013

Solving the economic puzzleBy John Hood

In researching my upcoming biography of Jim Martin, I’ve come across many revealing and entertaining stories about the state’s only two-term Republican governor. One of my favorites involves a Rubik’s Cube.

Invented by Hungarian professor Ernö Rubik in 1974, it hit the world market in 1980 and quickly became one of the bestselling toys of all time. It was still in its heyday when six-term congressman Jim Martin campaigned for governor in 1984. A Princeton-trained chemist, he had taught at Davidson College and served six years as a Mecklenburg County commissioner before his election to the U.S. House in 1972. As a teacher, he was always on the lookout for visual aids and other creative ways to explain scientific concepts. He carried this interest into politics. While a congressman, for example, he used teetering stacks of paper to illustrate the growth of federal regulation. It was a gimmick other politicians quickly emulated.

As a Republican running for governor, Martin needed to find ways to introduce himself to voters outside his Charlotte-based congressional district. He also needed to draw some attention during a campaign cycle that featured Ronald Reagan’s re-election bid and the spectacular U.S. Senate race between incumbent Republican Jesse Helms and Democratic Gov. Jim Hunt.

Martin remembered the Rubik’s Cube, which he had mastered years before, and turned it into a political prop. At the beginning of his stump speech, he would show a scrambled cube to the audience. He sometimes would say it signified the complexity of North Carolina’s economy. Other times, it represented the scrambled mess that was state government. As he continued his speech, he would seem absent-mindedly to twist and turn the cube without looking down. At just the right moment, he would raise the cube, each side a single color, and proclaim that if state leaders were thoughtful and diligent, they could get “it” — the economy or state government — “back into shape.”

It was a line that guaranteed applause. And looking back from the vantage point of 2013, I think Martin’s visual aid is still an appropriate illustration of the complex challenges facing North Carolina policymakers. Confronted with a persistently weak economy, Republican Gov. Pat McCrory and like-minded leaders of the legislature argue that reducing the state’s marginal tax rates on investment and business activity would attract more capital to North Carolina, boosting employment and incomes. Recent trends validate their concern. From 2000 to 2007, the value of capital investment in this state grew at a slower rate (about 12%) than the national average (15%) and such Southern standouts as Virginia (20%), Florida (21%) and Texas (28%). On the eve of the Great Recession, North Carolina companies were already weaker, less capitalized and less productive than those in competing states and nations. That’s one reason the recession hit us particularly hard.

However, to pretend that private capital formation is the only thing that matters in economic growth would be like solving only one side of a Rubik’s Cube and proclaiming success. The puzzle is more complicated than that. If you focus only on making one side monochrome, you’ll make the other five sides more scrambled. In theory, a 0% tax rate would maximize work effort and private investment. But it would also exclude funding core state services such as law enforcement and roads that can have their own stimulative effects on the private economy. Only anarchists believe that the state has no role to play in achieving prosperity. And only left-wing extremists believe that state government can spend its way to prosperity without having to worry about the size and structure of the resulting tax burden.

In the real world, everything that sounds good for economic development — tax relief, infrastructure investment, education spending, etc. — can be taken past the point of diminishing returns. The resulting puzzle is even more intricate and perplexing than a Rubik’s Cube because the relationships among economic variables are constantly changing. If Martin picked up a cube today, he could solve it the same way he did in 1984. But you can’t say the same about economic policy. Changes in business practices, consumer preferences, technology and the policies of other governments present today’s policymakers with a different puzzle altogether. The same is likely to be true 30 years from now.

So what’s the best way to solve the puzzle? Here’s my not-so-elegant answer: cheat. North Carolina politicians should look at more-successful economies, identify their key public policies and copy them. If that offends their pride, they need to look into another line of work.

John Hood is chairman and president of the John Locke Foundation. You can reach him at jhood@johnlocke.org.